Potential triple dissent to test Bernanke

By Ros Krasny

CHICAGO (Reuters) - Federal Reserve Chairman Ben Bernanke faces a potential mauling from three policy hawks in August that may test his apparent desire to keep interest rates steady until the smoke clears a bit more in financial markets.

Analysts sense that the outcome predicted by financial markets for the August 5 meeting of the monetary policy-setting Federal Open Market Committee -- a steady federal funds rate -- will come only after a bruising debate.

"Hawkish comments from Philadelphia Fed President Charles Plosser raise the odds that three FOMC members will dissent at the August meeting," said economists at Lehman Brothers. "It would be the first time since November 1992."

Plosser this week said the Fed should start to reverse course "sooner rather than later," echoing comments Minneapolis Fed President Gary Stern delivered on Friday.

"We can't wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on," said Stern, the Fed's longest-serving regional president but one who has not joined this year's jamboree of dissenters.

Dallas Fed chief Richard Fisher is arguably the ring-leader among the inflation hawks. Of Fed officials who get a vote this year on rates, Fisher has been the most outspoken and has already registered four dissents in favor of tighter policy.

Even with dissent in the air, financial markets see just a 10 percent chance for an increase in benchmark overnight rates in August from their current 2 percent.

By September, however, perceived prospects for a rate increase jump to 68 percent. Dealers fully price a hike by October and a possible year-end federal funds rate of 2.5 percent.

BERNANKE RULES

Still, Bernanke last week seemed to imply that the Fed is still a ways from a rate increase. If he prevails, the sense of his leadership of the Fed will be enhanced.

In contrast to the recent sharp rhetoric from Stern and Plosser, Bernanke suggested to Congress that greater stability in the financial system needs to be achieved before the Fed will act.

The global credit crunch, now approaching its first anniversary, has produced several false dawns, only to catch markets and policy-makers by surprise by taking a new and more damaging turn.

The assessment offered by the FOMC after its last meeting in late June that downside risks to growth had "diminished somewhat" was summarily ditched by Bernanke last week.

"Chairman Bernanke is clearly first among equals. Therefore, conflicts between his take on the world and those of other members should generally be resolved in his favor," Ed McKelvey, economist at Goldman Sachs, said in a research note.

Indeed, a study this week by the economic forecasting firm Macroeconomic Advisers showed that Bernanke now towers above the FOMC crowd in his ability to move markets, and presumably to telegraph the path of monetary policy.